47 Change without end Tough new rules on tax havens are forcing the country’s offshore banks to evolve
Tough new international rules on tax havens are forcing Mauritius’s offshore banks to evolve. Like other parts of the economy, the financial sector is looking to Africa for growth as it also moves away from plain vanilla services to provide more sophistic
For a country that prides itself on being plugged into the global flows of disembodied capital, many parts of the Mauritius economy feel reassuringly solid. A sleek, scarlet-orange Spanish tuna boat sits in the 130-metre dry dock of the Centre Naval de l’océan Indien (CNOI), a shipyard specialised in servicing fishing fleets plying the Indian Ocean, as well as the French navy. The yard has thrown its elf into ship-building, too. A prawn-hunting vessel sits up on blocks. Sparks are flying from busy welders. “It’s the first of a series
of eight such vessels – and, if all goes well, two dozen, for an Australian client,” says Arnaud Lagesse, chief executive of the island’s largest conglomerate, IBL Group, the majority shareholder in CNOI. It is just as well that economic diversification has real substance in Mauritius – a country whose top three exports are tuna, clothing and sugar – because the headwinds for its offshore financial sector are mounting. After the 2008/2009 financial crash, several decades of multinational companies using hubs like Mauritius to ingeniously structure their tax strategies, and years of stagnant wages in the West, there has been a populist backlash. Global capitalism, it appears, is not floating all boats. The results can be seen in the Trumps and the Brexits.
THE TAXMAN COMETH
But the pushback against opaque international financial centres has also come from new rules driven by the club of rich countries known as the Organisation for Economic Cooperation and Development (OECD). And also, in the case of Mauritius, in the amendment of a double taxation avoidance agreement signed with India in 1982. While the Indian media often criticises that deal for facilitating tax dodging, the chairman of the State Bank of Mauritius puts up a robust defence: “We are paying the price of our success,” says Kee Chong Li Kwong Wing (see interview page 58). “More than two-thirds of the foreign investment into India was channelled from Mauritius. If today India has been able to achieve development, Mauritius had a big role to play.” Whatever the case, that money and the associated fees that Mauritius derives from it are drying up, especially from United States investors who had previously used Mauritius to structure investment into India. In 2012, Mauritius represented almost a third of all foreign portfolio flows into India. By 2016, it was not even a fifth. To comply with new OECD directives, Mauritius has to demonstrate that it has a financial sector of ‘economic substance’ – that is to say, not a tax haven littered with anonymous boiler-plate companies that have shopped around to get an advantageous tax rate. The financial system must instead provide real services. Ominously, the list of things that the OECD does not consider ‘substantial’ includes things like providing treasury services and servicing the headquarters of a group of companies. That, says Mauritius’s minister for financial services, Dharmendar Sesungkur, is under discussion with the OECD “because the rules which have been imposed are quite stringent” (see interview page 50). To manage the transition to the OECD rules, the government is drawing up a new 10-year blueprint for the global business sector, a newish term for offshore finance. Here, the government of Mauritius is doing what it does best – leveraging private-sector expertise. “I’m very happy to see that there are work streams by stakeholder,” says Huns Biltoo of KPMG Mauritius, “so then you’ve covered the whole [financial] ecosystem.” Can the local players change their game soon enough? The lifecycle of India-focused funds suggests that a large chunk of them will cash out their investments around 2021, according to Biltoo. Mauritius by then will no longer be quite so appealing on the tax front, so investors would need to have other reasons to stay. The Mauritian economy has evolved before. It is a stalwart of the ‘value-chain’, economic jargon that means creating ever-more-valuable products, analogous to selling refined petroleum instead
The pro-business state is helping Mauritian companies venture into Africa